It takes two to tango: The complementarity of the derigging project and expanded tax credits.

April 14th, 2019 at 12:39 pm

In a hearing last week, an exchange between Rep. Katie Porter (D-CA) and JPMorgan’s CEO Jamie Dimon caught my eye. Dimon was touting the bank’s new minimum wage of $16.50, increasing to $18 in high-cost areas, for entry level workers. That’s a decent minimum wage, above the $15 that most progressive plans call for (and those proposals typically include a phase-in of numerous years). According to recent EPI analysis, $16.50 is well north of the national 40th percentile wage of just under $15.

To be clear, I’m not suggesting the highly profitable bank—market cap about $380 billion; Dimon made over $30 million last year—is fairly compensating its entry-level workers (Dimon says such workers tend to just out of high school). My point is an empirical one: given the nation’s wage structure, its (ridiculously low) federal minimum wage of $7.25, and the weak bargaining clout of low-wage workers, especially those without a college degree, a minimum/entry-level wage of $16.50 is actually pretty high.

Rep. Porter, however, pointed out that in pretty much any part of America you choose, a single mom with one child can’t make ends meet on that wage. She’s unquestionably correct, as she demonstrated after the hearing in this tweet (full disclosure: I’ve met Rep. Porter; she’s all that and a big bag of chips; whip-smart, data-driven…one of those new members with just the right recipe of heart, brain, conviction, analytics, etc…).

You can read more about their exchange here, but it led me to ask why is the US wage structure so insufficient and what can we do about it? It’s a question that all of us should have at the top of our minds when listening to the proposals from those who would lead the nation.

What can we do about this mismatch between earnings and needs?

One answer is to work on two tracks, near term and long term. In the near term, we need robust wage supports in the form of fully refundable tax credits (i.e., you get the credit whether or not you owe any taxes), along with other work supports, including child care, health care, and housing.

Over the longer haul we must correct structural imbalances that have, over at least the last 40 years, reduced the bargaining clout for workers relative to employers. The power shift is a function of many forces, including the decline of unions and collective bargaining, but it also relates to the way we’ve handled globalization, the rise of hands-off economics, specifically the notion that progressive interventions are anti-growth (a line of thought that’s led to supply-side policies like cutting taxes for the rich and benefits for the poor), austere fiscal policy, and the many other aspects of what is often labeled the “rigged economy.”

It is, however, easy to write “correct a structural imbalance” and much, much harder to do so. This new piece by the Roosevelt Institute offers a resonant diagnosis and prescription to this structural power imbalance, but it took a long time to get here. Moreover, our uniquely toxic money-in-politics problem has allowed the narrow group of big winners to worm their way into entrenched power. It will take time, energy, resources, and commitment to reduce their hold. Derigging the economy is the right goal, but it’s one that’s going to take awhile and, relative to many of my fellow progressives, I’m less certain of the political support for this project. That doesn’t make it any less urgent, but it does raise the bar we must clear.

Which brings me to a more immediate solution to the problem Porter raised. It comes in the form of a bill introduced last week by four D senators (Brown, Bennet, Durbin, and Wyden), and given the forces swirling around that I just described, it’s a proposal that hits a sweet spot, accomplishing ambitious, long-held progressive goals in a way that is inviting to more moderate Democrats (at this moment, 46 Senate Democrats have signed on).

I’m talking about the Working Families Tax Relief Act (WFTRA), a proposal designed to raise the incomes of low-income and working-class households, with and without kids, by expanding two existing tax credits: the Earned Income and Child tax credits (EITC and CTC). For details, see here, but according to analysis by colleagues of mine at the Center on Budget and Policy Priorities (CBPP), a group with deep expertise on these types of tax credits, the bill would raise the incomes of 46 million low and moderate-income households, more than a third of American households. While it wouldn’t close the whole gap shown in Porter’s tweet, it would close part of it.

In contrast to the regressively targeted Trump tax cuts, this bill would lift 29 million people, including 11 million kids, above or closer to the poverty line, lowering the child poverty rate from 15 percent to 11 percent. Its CTC changes would raise the incomes of families with over 40 million children, lifting 1.3 million children out of deep poverty (income below half the poverty line, or about $10,000 for a single parent with two kids), and thereby reducing the deep child poverty rate from 5 percent to 3 percent.

To put all these percentages in a more concrete context, consider some of CBPPs examples of the bill’s impact of the incomes of some families playing by the rules, doing their best to makes ends meet in corners of our labor market where, even at low unemployment, wages are just too low.

Consider a mom with two kids, 4 and 7, who makes $20,000 as a home health aide. WFTRA would raise her CTC by $2,210 and her EITC by about $1,460, for a combined gain of about $3,670. For a married couple where one spouse makes a more moderate income of $45,000 and the other cares for their two young children, their EITC/CTC goes up by $3,460.

Low-income workers without kids get very little from the current EITC, and, in fact, can be taxed into poverty. CBPP looks at the case of a full-time, fast-food worker paid the federal minimum wage. She earns $14,500 and pays more than $1,250 in combined federal income and employee-side payroll taxes. As a result, CBPP points out, “the tax code pushes her below the poverty line. The bill would increase her EITC by about $1,530, so she would no longer be taxed into poverty.”

The WFTRA accomplishes these goals mostly by tweaking the parameters and eligibility standards of the two existing credits it expands (importantly, given how much families with very young kids need the money, it adds an addition credit for families with kids under 6). The fact that it builds off successful, existing programs that maintain some bipartisan support is a strong selling point and probably responsible for all those Senate sponsors.

I reiterate that when it comes to pushing back on decades of inequality and much weakened bargaining power of lower paid workers, it’s critical to think big and outside the box. Progressives have welcomed calls for universal coverage, Sen. Warren’s wealth tax, and Sen. Bennet and Brown’s proposal for a child allowance of the type that exists in most other social democracies. But WFTRA adds real and much needed progressivity to our tax code, and it does so in a way that gets a sign-on from both Senator Elizabeth Warren, a highly progressive Democrat from Massachusetts, and Senator Manchin, a moderate from West Virginia.

Still, the structure of the WFTRA is insufficient for some on the left. Matt Bruenig objects to the phasing in of benefits with earnings, as this approach provides more help to higher earning families. Fair point, but one that undervalues WFTRA’s proposed change to the CTC which goes the other way: it’s fully refundable even to families with no earnings. In fact, families with incomes so low that they get nothing under the current CTC would come away with a few thousand under WFTRA ($6,000 if they had 2 kids under 6 and no earnings), giving it characteristics of the more progressive child allowance. Bruenig also implicitly assumes something about which I’m skeptical: that there’s political support for delinking the highly effective, bipartisan-supported EITC, from work.

In sum, the pursuit of economic justice requires us to work on various tracts. The overarching goal of derigging the economy and righting structural imbalances require new rules of the road, trade agreements forged by workers, not just investors, big changes to anti-trust, corporate governance, patents, and labor standards. We must run full employment economies so there’s pressure on the private sector to create jobs and raise wages. We must raise worker relative to corporate power. And we must recognize that even at full employment, markets still won’t solve the problems of poverty, racial discrimination, and unequal opportunity, thus requiring a progressive tax and transfer system.

The WFTRA offers what looks to me like a timely, politically viable answer to that last part.

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5 comments in reply to "It takes two to tango: The complementarity of the derigging project and expanded tax credits."

  1. Bob Palmer says:

    These seem like good political and economic solutions. An unavoidable downside is that we will move more toward a centrally-directed managed economy. When Roosevelt empowered unions to negotiate higher wages and improved benefits, he was using a market-based solution. But unions are no longer an effective counterweight to concentrated wealth and political power. Something must be done, and using state power to improve the lot of working citizens and their children is a workable solution. The current state of affairs is unacceptable.


    • Procopius says:

      You invite the question, “Can anything be done to reverse the destruction of unions we’ve had since Reagan devastated the Air Traffic Controllers?” Even if we move toward a “centrally-directed managed economy,” wouldn’t that just be toward the status quo ante? The neoliberals since Carter have moved us far to the right from where we were even under Nixon. In fact, sometimes I think the rot goes back to the attitude toward government that was manifested by JFK, pragmatic and “tough.” Solve problems quickly but don’t bother with analysis of the consequences. Doesn’t matter if you know anything about the circumstances, just do “something.”


  2. Fred Donaldson says:

    Any program that takes public money and distributes it to low earners also encourages companies to pay less, because the government makes up the difference between living and slave wages. Forcing a realistic minimum wage – Australia’s many-tiered system, for example – allows everyone to have a living wage and hold their heads up high.

    The EITC (which ends when you are 65, regardless of whether you are working or on Social Security) allows a $7.25 minimum to increase capitalist profits by reducing labor unrest and costs. It gives preference to folks with more children, but how carefully is that administered? It also applies to anyone who works “under the table”, and can even reward business owners who pretend to make no profits and pay no salary to themselves.

    Look back at this. In the mid-60s union construction electricians were making more than $20 an hour. Union laborers – the lowest pay grade – were at $8 an hour. That $8 total meant $16,640 a year at a time when a Levittown rancher cost $11,000 new (now listed at $220,000). Imagine the low wage worker making more a year than a new house price?

    Just finished my taxes and learned that while other couples can exclude $77,000 in long term capital gains, the retired must add it to AGI and increase income taxes on their Social Security. So much for IRAs. If the money had originally been put in stocks without an IRA, the growth in value would be tax free, not tax deferred. Check the $32k on earnings test for Social Security tax exclusion, and tell me why hasn’t it change in more than 30 years?


  3. Kevin Rica says:

    The big problem is that before-tax wages are dealing or stagnant. State intervention to supplement what workers are paid just makes things more complex.

    The COC knows what it needs to do to keep wages low (more immigrants) and now AOC and the left are making common cause with them.


  4. tony says:

    welcome back jb! you have been sorely missed


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